INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS; Japan Officials Get Tough With U.S. Financial Firms

By SHERYL WuDUNN

Published: May 27, 1999

TOKYO, May 26—
For years, American officials have called on Japanese regulators to be tougher on the financial services industry here, but they hardly expected that the result would be raids on American companies.

Japanese officials respond that they are scrutinizing the Americans because Japanese companies had hidden losses and engaged in deceptive practices after American financial experts advised them of the latest methods.

Thus, Cresvale International Ltd., owned by Princeton Economics International Ltd., became the latest foreign target on Monday, as Japanese regulators made a snap inspection and stepped up the intensity of their inspections, just days after they had marched into Lehman Brothers.

The regulatory authority, the Financial Supervisory Agency, was spun off from the Finance Ministry a year ago, and it is trying to show that it is cracking down on financial misconduct. The Finance Ministry had often tolerated financial misreporting -- or even tacitly hinted to banks to file deceptive reports -- and the lack of clear and reliable financial information and tough regulation is often blamed for some of Japan's banking problems. The new regulators in particular are trying to demonstrate their role as tough watchdogs in preparation for a more intense and embattled environment under Japan's financial deregulation, called the Big Bang.

Japanese banks, securities firms and insurance companies have complained that the Big Bang liberalization means they face powerful foreign competition at just the time when many Japanese companies are staggered by losses, bad debts, and stricter rules.

Though regulators have been poring over the books of Japanese banks for more than a year, they have long neglected the foreign banks. Indeed, Cresvale, which specializes in brokering and underwriting equities and bonds in Japan, was last inspected five years ago.

John C. Gracey, branch manager of Cresvale in Tokyo, said on Tuesday that the examination was ''routine.'' Still, the sudden audit of Cresvale, so soon after regulators swooped into the Tokyo offices of Lehman Brothers last Thursday, also suggests that the regulator's 160 inspectors are close to ending their examination of Credit Suisse First Boston, which has been the focus of regulatory scrutiny since January.

Regulators are expected to wind up that investigation by the middle of next month and are weighing penalties and temporary suspensions for some of the company's operations. Officials at the Financial Supervisory Agency are also dogged by the memories of American penalties imposed by the Federal Reserve Bank on Japan's Daiwa Bank, after a rogue trader was found to have hidden around $1.1 billion in losses.

Though that penalty was $340 million and some in Japan would like to impose a similarly tough penalty this time against Credit Suisse, there are legal rules here that appear to limit penalties in Japan to much smaller sums, possibly as little as $1.2 million.

Derivatives, which have been an extremely profitable business for foreign firms in Japan, have long been a gray legal area of finance in Japan. Foreign executives are watching the Credit Suisse case closely because they worry that Japanese regulators may be trying to make up for ambiguities in the law. Japanese officials respond that international compliance standards should be adopted in Japan as well, even if the laws are vague.

The investigation into Credit Suisse had been complicated by the initial response of panicky employees in Credit Suisse's Tokyo office, who virtually within a day after Japanese auditors began inspecting the books in January began shredding important documents that might have revealed violations by the firm.

After Credit Suisse executives told auditors in February of the document destruction, Japanese regulators became more suspicious and wary of other potentially evasive tactics that the firm might adopt. Credit Suisse, worried about its reputation and about clients walking away from the firm, recently suspended two senior executives and cut bonuses of others. And last Friday, it publicly apologized for any misconduct that may have obstructed the investigation.

Japan's regulators have been looking into the accusations that Credit Suisse and other firms, perhaps even Lehman Brothers, may have helped Japanese financial institutions, like Long Term Credit Bank, conceal losses through a convoluted path of transactions that has taken advantage of Japan's loose accounting rules. Those accounting rules, which Japan is now modernizing, have long allowed Japanese companies to obscure their books.

Neither Credit Suisse nor the Financial Supervisory Agency will officially comment on any such transactions.

The exact reasons for the Government's inspection at Cresvale has not been disclosed. The firm was acquired from a British investment bank in late 1995 by Princeton Economics International, a global economic research and advisory company based in New Jersey.